Peyto Exploration & Development Corp. (TSX:PEY) ("Peyto” or the
“Company") is pleased to announce the achievement of its year-end
2017 production target of 115,000 boe/d. Together with its industry
leading cost structure and robust hedging program, the company
expects to report another profitable and successful year in 2017.
In addition, Peyto announces today a revised capital plan for 2018
in light of the recent 40% decline in near-term natural gas prices.
The plan is designed to prudently defer investment on a portion of
Peyto’s inventory in order to ensure maximum returns can be
achieved from these opportunities, while at the same time
strengthening the Company’s financial position for the future. This
plan involves the following five elements:
- Development plans deferred and capital budget reduced
to $200-$250 million. The preliminary 2018 capital budget
announced Nov 8, 2017, ranging from $300-$450 million, has been
reduced to $200 to $250 million. As always, investment will be
directed toward the highest return opportunities within Peyto’s
vast inventory of drilling locations, now with particular focus on
the most liquids rich portions of the Company’s Deep Basin assets.
For example, Peyto’s lands in the Greater Sundance Area contain
approximately 2.4 TCFe of net Cardium resource with only 14%
recovered to date and over 500 internally identified drilling
locations. The Cardium in this area yields between 40 to 60
bbl/MMcf of natural gas liquids (greater than 50% C5+) and Peyto
plans to exploit this undeveloped resource with newly designed
horizontal wells with higher density fracture treatments. As Peyto
enjoys the benefit of very little land expiring in 2018, it has the
freedom to develop much of its lands as market conditions
dictate.
- Monthly dividend reduced to $0.06/share.
Starting with the January dividend, for shareholders of record on
January 31, 2018 to be paid on February 15, 2018, the monthly
dividend will be reduced from the current $0.11/share to
$0.06/share. This new dividend level will align better with
projected earnings for 2018 and lower near term natural gas prices.
In conjunction with the reduced capital program, the reduced
monthly dividend will free up cash for debt reduction, share
repurchases, and potential new business opportunities that may
arise.
- Share buyback program. Peyto intends to apply
to the Toronto Stock Exchange (“TSX”) to implement a normal course
issuer bid (“NCIB”). Subject to TSX approval, the NCIB is expected
to commence on January 22, 2018 and will terminate on the earlier
of 1) January 21, 2019; or 2) the date on which the maximum number
of Common Shares that can be acquire pursuant to the NCIB are
purchased.
- Term debt issuance. As announced on January 2,
2018, Peyto has continued to protect its balance sheet from rising
interest rates with the closing of another private placement of
senior unsecured notes. On that date, Peyto issued CND$100 million
of senior unsecured notes which bear a coupon rate of 3.95% and
mature on January 2, 2028. The issuance of senior notes expands
Peyto’s aggregate borrowing capacity to $1.92 billion, split into a
$1.3 billion, 4 year revolver with a stated term date of October
2021 and $620 million of senior unsecured notes. Peyto now has
approximately $600 million in available borrowing capacity.
- Strong near-term hedge book and medium-term market
diversification strategy. Peyto’s hedging strategy in the
past has used fixed price financial swaps to smooth out the
volatility in natural gas prices. For 2018, this program has
secured a fixed price of $2.68/Mcf for approximately 75% of 2018
forecast natural gas production, which combined with liquid
revenues ensures close to 90% of projected revenues will not be
subject to natural gas price volatility. These revenues, when
combined with the remaining unhedged natural gas revenue, is
expected to deliver sufficient funds from operations to more than
cover both the capital program and dividend payment while also
generating significant free cash flow that can be used for debt
repayment or share buybacks. As well, the Board of Directors has
approved a market diversification strategy to diversify a portion
of Peyto’s future natural gas sales away from the AECO hub.
Operational Update
Peyto exited 2017 hitting its year end
production target of 115,000 boe/d. Of this production,
approximately 11,000 boe/d was natural gas liquids and 42% was from
wells drilled and connected in 2017. A total of 143 gross (138.5
net) wells were drilled in the year, with 91 in the Greater
Sundance area, 47 in the Brazeau area and 5 in the newly
established Whitehorse area. The Notikewin formation contributed
the largest proportion of new production at 49% while the Wilrich
formation contributed 36% of the volumes. Production in the Brazeau
area exited the year at 29,000 boe/d up from 19,000 boe/d at the
start of the year, while production from the Greater Sundance area
remained level at approximately 80,000 boe/d.
Revised 2018 Budget
Both AECO and Henry Hub natural gas prices have
softened since Peyto released its preliminary 2018 budget back in
November 2017. At that time, the future strip for Henry Hub and
AECO prices for calendar 2018 was US$3.09/MMBTU and CND$2.02/GJ
respectively. Today, these same benchmark prices are USD$2.87/MMBTU
and CND$1.35/GJ. Although Peyto can still generate positive returns
on its well economics at these prices, the returns are
significantly improved merely by delaying investments until higher
natural gas prices on the future strip, or lower development costs,
can be realized.
In response to these lower natural gas prices,
Peyto is planning to defer its drilling activity and is reducing
its 2018 capital budget until natural gas prices rebound. The
revised capital budget for 2018 is now expected to range between
$200 and $250 million. Activity will include drilling, completing
and connecting approximately 50 to 60 net wells, installing a new
20 MMCF/d gas plant in the Whitehorse area, and adding new drilling
inventory through new land purchases. Much of this activity will be
scheduled in the latter half of the year to ensure new, flush
production is coming on-stream into next winter’s higher natural
gas prices. This reduced program is expected to add approximately
25,000 boe/d of new production by year end to the existing
production base which is anticipated to decline at approximately
35% throughout the year. Average production for the year 2018 is
expected to be 2% lower than 2017.
The current 2018 future AECO strip price for
Alberta natural gas is $1.35/GJ, which when combined with a
Canadian Light Sweet oil price of approximately $75/bbl, yields an
unhedged revenue stream of approximately $2.30/Mcfe, using Peyto’s
current blend of gas and NGLs. As mentioned, Peyto has secured a
fixed price for approximately 75% of the expected 2018 natural gas
production at an average price of $2.34/GJ ($2.68/Mcf). When these
prices are adjusted for Peyto’s historic NGL and heat content
premiums and are combined with the Company’s industry leading cash
costs of approximately $0.75-$0.80/Mcfe, they are expected to yield
cash netbacks of approximately $2.21/Mcfe ($13.30/boe).
Using these commodity and cost assumptions Peyto
would generate funds from operations well in excess of the required
combination of capital program and dividend payment. These excess
funds will be used to reduce indebtedness and/or purchase commons
shares under the NCIB.
Share Buyback
Peyto intends to apply to the TSX to implement a
NCIB. The Company believes that implementing a NCIB is a prudent
step in this volatile energy market environment, when at times, the
prevailing market price does not reflect the underlying value of
Peyto’s Common Shares. The timely repurchase of Common Shares for
cancellation represents confidence in the long term prospects and
sustainability of the Corporation's business model. The
Corporation's conservative balance sheet affords Peyto the ability
to buy back shares when warranted. Any reduction in share count
adds per share value to shareholders and the NCIB adds another tool
to management's disciplined capital allocation strategy.
Pursuant to the NCIB, Peyto may purchase up to
12,158,897 of the outstanding Common Shares, which represents
approximately 10% of the "public float" (as such term is defined by
the policies of the TSX). As at January 8, 2018, Peyto had
164,874,175 Common Shares issued and outstanding and the public
float was 121,588,969 Common Shares. Pursuant to the rules of
the TSX, the total number of Common Shares that Peyto is permitted
to purchase is subject to a daily purchase limit of 246,866 Common
Shares, which represents 25% of the average daily trading volume of
987,467 Common Shares on the TSX for the six-month period ended
December 31, 2017; provided, however, that Peyto may make one block
purchase per calendar week which exceeds the daily purchase
restriction. The actual number of Common Shares purchased
pursuant to the NCIB and the timing of such purchases will be
determined by Peyto and is dependent on future market
conditions.
Subject to approval by the TSX, the NCIB is
expected to commence on January 22, 2018 and will terminate on
January 21, 2019, or such earlier time as the NCIB is completed or
is terminated at the option of Peyto. Purchases under the
NCIB will be effected through the facilities of the TSX and/or
Canadian alternative trading systems at the prevailing market price
at the time of such transaction. All Common Shares purchased under
the NCIB will be cancelled.
Marketing Strategy
The Board of Directors has approved a new
natural gas marketing diversification strategy. Over time, the
Company plans to have 40% of its natural gas sales linked to AECO
based pricing, 40% linked to NYMEX pricing and 20% sold directly to
intra-Alberta industrial markets. As before, Peyto will continue to
hedge future prices to smooth out the volatility in both natural
gas markets.
At present, Peyto has 100% of expected 2018
natural gas production exposed to the AECO market with
approximately 75% pre-sold (hedged) at an average price of $2.34/GJ
or $2.68/Mcf, and 20% of 2019 natural gas production pre-sold at an
average price of $2.06/GJ or $2.36/Mcf.
Management changes
Scott Robinson, Peyto’s current Chief Operating
Officer (COO) has decided to transition towards retirement. Scott
will continue with Peyto in a part time role as Executive Vice
President, New Ventures and the Company looks forward to his
continuing involvement in this new role. Peyto is also pleased to
announce the appointment of Jean-Paul (JP) Lachance, Peyto’s
current VP Exploitation, to the position of Executive Vice
President of Engineering and COO. Jean-Paul has been with Peyto for
7 years and has played a key role in the profitable exploitation
and development of the Company’s Deep Basin assets since joining
Peyto in 2011.
Outlook
Peyto has spent the past 20 years profitably
building a solid foundation of resources and infrastructure that
will endure for many years to come. Occasionally over that time,
the Company has paused during its ascent to review its business
plan and adjust to the changes in prevailing economic and market
conditions. This is one of those times when resource development,
particularly in the Western Canadian Sedimentary Basin, is
outpacing both market access and market demand, which has
consequently upset the normal equilibrium in supply and demand for
natural gas. What is true today, as in the past, is that this is a
temporary situation that industry must solve with reduced
investment and lower supply combined with increased demand from
market expansion.
Although the Company does not have to slow down
and could, through its superior supply and production cost
advantage, continue with a high level of reinvestment, it has
decided to decelerate development in anticipation of higher natural
gas prices, better costs and greater returns that lie ahead with
the re-establishment of a supply/demand equilibrium. As with all
industry participants, Peyto’s marketing efforts have only
established price protection for existing production built from
previous capital investments. The returns for all new investments
must be measured against the current unhedged strip pricing. Peyto
will remain nimble to changing market dynamics and will have the
financial and operational flexibility to ramp up activity quickly.
Management is actively working to enhance Peyto’s position for that
time by redeploying many of its technical staff from development
operations to expanding the Company’s inventory of drilling
opportunities. The Company anticipates this work will yield to an
exciting new chapter in Peyto’s longstanding history in the
Canadian energy industry.
In the meantime, shareholders can be confident
that a continued focus on financial flexibility, and an industry
leading cash cost structure, which delivers one of the highest cash
margins in the industry, will continue to be Peyto’s greatest
insulation from the volatility in natural gas prices. The long
life, and ultimately low decline nature of Peyto’s Deep Basin
production creates a solid foundation of value from which future
value creation can and will occur.
Darren GeePresident and CEOJanuary 11, 2018
Certain information set forth in this
document, including management's assessment of Peyto’s future plans
and operations, capital expenditures and capital efficiencies,
contains forward-looking statements. By their nature,
forward-looking statements are subject to numerous risks and
uncertainties, some of which are beyond these parties' control,
including the impact of general economic conditions, industry
conditions, volatility of commodity prices, currency fluctuations,
imprecision of reserve estimates, environmental risks, competition
from other industry participants, the lack of availability of
qualified personnel or management, stock market volatility and
ability to access sufficient capital from internal and external
sources. Readers are cautioned that the assumptions used in
the preparation of such information, although considered reasonable
at the time of preparation, may prove to be imprecise and, as such,
undue reliance should not be placed on forward-looking statements.
Peyto's actual results, performance or achievement could differ
materially from those expressed in, or implied by, these
forward-looking statements and, accordingly, no assurance can be
given that any of the events anticipated by the forward-looking
statements will transpire or occur, or if any of them do so, what
benefits Peyto will derive there from. In addition, Peyto is
providing future oriented financial information set out in this
press release for the purposes of providing clarity with respect to
Peyto’s strategic direction and readers are cautioned that this
information may not be appropriate for any other purpose. Other
than is required pursuant to applicable securities law, Peyto does
not undertake to update forward looking statements at any
particular time. To provide a single unit of production for
analytical purposes, natural gas production and reserves volumes
are converted mathematically to equivalent barrels of oil (BOE).
Peyto uses the industry-accepted standard conversion of six
thousand cubic feet of natural gas to one barrel of oil (6 Mcf = 1
bbl). The 6:1 BOE ratio is based on an energy equivalency
conversion method primarily applicable at the burner tip. It does
not represent a value equivalency at the wellhead and is not based
on current prices. While the BOE ratio is useful for
comparative measures and observing trends, it does not accurately
reflect individual product values and might be misleading,
particularly if used in isolation. As well, given that the
value ratio, based on the current price of crude oil to natural
gas, is significantly different from the 6:1 energy equivalency
ratio, using a 6:1 conversion ratio may be misleading as an
indication of value.
Darren Geedgee@peyto.com 403-237-8911
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